• USD/JPY is seen consolidating the overnight strong gains to a fresh YTD peak.
• The Fed-BoJ policy divergence continues to weigh on the JPY and lends support.
• Economic woes benefit the safe-haven JPY and cap gains, for the time being.

The USD/JPY pair oscillates in a narrow band, just above the 143.00 mark through the Asian session on Friday and consolidates the previous day's strong rally to a fresh high since November 2022.

The Japanese Yen (JPY) is undermined by a big divergence in the monetary policy stance adopted by the Bank of Japan (BoJ) and other major central banks, which, in turn, acts as a tailwind for the USD/JPY pair. It is worth recalling that the minutes of the April BoJ meeting released on Wednesday showed that the nine-member board saw the need to keep ultra-low interest rates to support the fragile domestic economy. Adding to this, BoJ policymaker Seiji Adachi brushed aside expectations of an early tweak in the yield curve control policy and said that it was too early to phase out ultra-loose monetary policy due to uncertainty over the price outlook.

In contrast, Federal Reserve (Fed) Chair Jerome Powell, during the second day of congressional testimony, backed the case for more interest rate hikes in the US, albeit at a "careful pace". Powell added that we don't see rate cuts happening any time soon and the Fed is going to wait until it is confident that inflation is moving down to the 2% target. This, in turn, assists the US Dollar (USD) to preserve the overnight recovery gains from its lowest level since May 11 and lends additional support to the USD/JPY pair. That said, slightly overbought conditions on the daily chart hold back traders from placing fresh bullish bets and capping the upside.

Furthermore, worries about economic headwinds stemming from rapidly rising borrowing costs weigh on investors' sentiment, which seems to benefit the safe-haven JPY and contributes to keeping a lid on further gains, at least for now. Nevertheless, the aforementioned fundamental backdrop seems tilted firmly in favour of bullish traders and suggests that the path of least resistance for the USD/JPY pair is to the upside. Hence, any intraday pullback might still be seen as a buying opportunity and remain limited. Market participants now look to the release of the flash US PMI prints for short-term trading opportunities on the last day of the week.

Technical levels to watch